Pension Funds Reap Healthy Returns from Alternative Fixed Income
In their quest for higher yields in the wake of the financial crisis, pension funds have been seeking alternatives to traditional bond investments. As conventional lenders pull back, hedge funds and asset managers are meeting this demand by offering loans and packaging the debt as alternative fixed-income products.
By Frances Denmark
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The financial crisis left its mark on nearly all pension portfolios, and Metropolitan Government of Nashville and Davidson County was no exception. The Nashville, Tennessee-based public pension fund had an outsize equity allocation of 79 percent before shrinking by more than a quarter in the disastrous 2008 fiscal year, from $2.2 billion to $1.6 billion in assets.
As part of a change in direction, CIO Fadi BouSamra sought out so-called alternative fixed-income strategies to take advantage of dislocated credit markets. In late 2008, BouSamra won board approval to invest $25 million, or 1.5 percent of Nashville’s assets, in Pimco Distressed Mortgage Fund II, offered by Newport Beach, California-based bond giant Pacific Investment Management Co.
That was a smart move. Through November 30, 2012, the Pimco allocation had yielded a cumulative 173 percent. But BouSamra was just getting started. In 2009, Nashville bolstered its new alternative fixed-income portfolio by committing a total of $65 million to alternative investment manager Angelo, Gordon & Co. and credit specialist Marathon Asset Management. The two New York based firms were making use of a new federal government program: public-private investment partnerships. “We’re not an endowment, but we have a lot of opportunistic and risk-aware investments,” says BouSamra, who had become Nashville’s first investment professional when he joined the then-$1.1 billion fund in November 2003.....